EU politicians bemoan cost of strong euro

The world is edging closer to all-out currency conflict as Europe’s politicians join a chorus of policymakers across the globe pushing for devaluations to fight for market share.

Jean-Claude Juncker, EuroGroup chief, has signalled that Europe is no longer willing to be the last player holding the toxic parcel of an overvalued exchange rate, describing the euro as “dangerously high" after its three-month surge against the US dollar, yuan and yen. The comments follow warnings by two French ministers this month that the strong euro is holding back efforts to pull France out of deep industrial slump.

Alexei Ulyukayev, deputy head of Russia’s central bank, said the tilt in EMU policy marks a new escalation as every major bloc of the global economy tries to drive down its exchange rate. “We are now on the threshold of very serious currency wars," he said.

Korea has asked the G20 take a stand against beggar-thy-neighbour policies in Moscow next month, accusing Japan and the West of covert debasement through loose money.

Japan’s Prime Minister Shinzo Abe kicked off the latest skirmishes by threatening to change the Bank of Japan’s statute unless it agrees to launch a monetary blitz and weaken the yen. The euro has rocketed by 20 per cent against the yen since July.

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“This will soon start to hurt core Euroland and Germany. The Japanese compete in the same export niche of cars, machine tools and electronics," said Hans Redeker from Morgan Stanley. He warned that European banks are still repatriating funds as they cut foreign assets to meet tougher capital rules, pushing the euro higher.

Global central banks – especially in Asia – are also stepping back into the EMU debt market after a buyers’ strike last year. While they help cap bond yields, they are also capping their own currencies against the euro. Mr Redeker expects the euro to punch yet higher early this year before buckling and crashing to $US1.08 by 2014.

Julian Callow from Barclays said the trade-weighted euro has risen 6 per cent since the third quarter of 2012. If sustained, this will lop around 0.4 per cent off euro zone GDP this year when the economy is already contracting.

The ECB has so far refused to act to curb euro strength, standing aloof as Japan, the US, Britain, Switzerland, Norway, New Zealand and Korea itself, among others, try to steer their currencies lower. Austria’s ECB governor Ewald Nowotny said euro strength is “not a matter of major concern". ECB president Mario Draghi last week insisted “both the real and the effective exchange rate of the euro are at their long-term average".

The historical rate may mean little. A Morgan Stanley study found the euro’s “fair" rate is $US1.53 for Germany, $US1.23 for Holland, $US1.19 for Italy and $US1.06 for Greece.

The Lisbon Treaty gives EU finance ministers the crucial say over the exchange rate. The “Ecofin" council can fix the euro against other currencies by unanimous vote, and can shape a “dirty float" by a qualified majority vote. Any such ruling would compel the ECB to shift policy.

Pressure for action is mounting as the slump deepens. Portugal’s central bank expects contraction of 1.9 per cent this year. The Netherlands said Dutch GDP will fall 0.5 per cent. Germany slashed its forecast from 1 per cent to 0.4 per cent.

France is the pivotal state, with the heft to build a coalition. It has been losing global export share since EMU began. Industry Minister Arnaud Montebourg said last week multilateral trade deals are “dead" and slammed predatory practices by China.

Adam Posen, a former UK rate-setter, said there could be a chain-reaction this year as each country resorts to “sauve qui peut" policies.The underlying problem is a global saving glut as the world saving rate hits a record 24 per cent of GDP, chiefly driven by Asia and aging effects. Trade experts say the international system cannot return to healthy balance until excess capacity in global industry is whittled away.